Almost every business owner has at least one trusted, long-tenured employee who is indispensable to the business. They keep things running smoothly when you’re out of the office, solve problems with the team before they get to you, and take care of details and customers the right way.
Sometimes, you lay awake at night wondering what you’d do without them. And it’s only a matter of time. Someone with that much drive, experience, and skill is bound to outgrow your company eventually. They have a couple of options: look for a bigger company with more opportunity or go off to start their own business. Both options leave a hole in your workforce and create more and better competition in your market.
But maybe there’s a third way. With some careful planning and plenty of clear communication, you can create a succession plan that turns your key employee into a partner and positions him to buy the business in a few years. If your exit strategy doesn’t include family taking over, selling to someone you know and trust can be a great option rather than putting your company on the open market.
The benefits for both of you are obvious. You retain a great employee who becomes even more valuable as he takes on more responsibility and an ownership mentality. Your workers, your customers, and your vendors all know and trust your successor, making your transition into retirement smoother and less harrowing. Your employee has a well-defined future with a company that values and rewards his efforts. Taking over the company is much less daunting than starting a company from scratch, and he’ll be able to plan changes he wants to make as he’s learning from you during your last couple of years in the business.
So the why part of the decision is relatively easy. It’s the how that matters most, though, so here’s how to get it done right.
The first advisor you’ll need is a business intermediary. I’ve helped lots of owners think through their succession plan and how they want the transition out of their business to look and feel. I help them establish a reasonable timeline for the transition and talk about how to avoid pitfalls that can make the deal fall through.
My goal is to help the owner and his successor determine a fair market value for the business. It can be a complicated process, since both parties are financially and emotionally involved in the business, and like any seller and buyer, may have competing goals and ideas about the company’s value.
Having an objective third party develop a fair valuation of the company is the first step in the process of a partner buyout: we have to establish what it is the partner is buying. A business intermediary can also help you understand the various ways the deal could be structured. Lenders tend to like partnership buyouts more than traditional sales, so it might be easier to get a loan or negotiate more favorable terms. You’ll also have to decide how much, if any, owner financing you’re willing to contribute.
It’s critical that you find a competent and experienced attorney to help you write the partnership agreement or change to the operating agreement. How the agreement is structured, including what happens if one or both partners change their minds or the company starts to fail, will be the difference between a successful buyout and a bitter and prolonged fight at the end of your career.
In the next post, we’ll talk about how to structure an agreement that works for you.